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Aaron's (AAN) Stock Falls on Q3 Earnings Miss, Revenues Beat

Aaron's, Inc. AAN incurred a negative earnings surprise of 20.4% in the third quarter of 2017, after five consecutive quarters of earnings beat. However, the company’s top line maintained its positive surprise trend for the third straight time. Also, management reiterated its outlook for 2017.

Markedly, shares of this Atlanta-based company fell 7.3% on Oct 27 on dismal quarterly earnings, which also dipped on a year-over-year basis. In fact, this Zacks Rank #4 (Sell) stock was down 15.4% in the last three months compared with the industry’s decline of 4.1%.

Nevertheless, results gained from the company’s outstanding Progressive Leasing performance, along with improvement at Aaron's Business. Additionally, growth in lease margin both on a sequential and year-over-year basis continued as progress on write-offs and robust sales growth trends contributed to the quarterly result.

However, the results were somewhat offset by the impacts of Hurricanes Harvey and Irma, which, in turn, affected Aaron’s various stores and retail partners.

Q3 Highlights

Aaron's posted adjusted earnings of 43 cents per share, which missed the Zacks Consensus Estimate of 54 cents and also declined 14% from the prior-year quarter. Also, management stated that the total anticipated effect of both Hurricanes Harvey and Irma was in the band of 6-8 cents per share in the third quarter.

Including one-time items, the company recorded earnings of 35 cents per share that declined 12.5% year over year.

Aaron's, Inc. Price, Consensus and EPS Surprise

Aaron's, Inc. Price, Consensus and EPS Surprise | Aaron's, Inc. Quote

This rent-to-own company’s top line came in at $838.9 million up 9.1% year over year and also ahead of the Zacks Consensus Estimate of $830 million. This upside was driven by robust revenue growth witnessed at the Progressive and DAMI segments, somewhat offset by decline in revenues at the Aaron's Business.

Aaron’s franchisee revenues also declined 20.9% to $178.2 million in the reported quarter. Comps at the company’s franchise stores decreased 5.8% and same-store customer counts declined 3.9% as well. In fact, the franchisees had a customer base of 417,000, representing a 23.1% decline year over year.

The company’s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the quarter fell 11.4% year over year to $67.7 million. Moreover, the adjusted EBITDA margin plunged 180 basis points (bps) to about 8.1% in the quarter.

Progressive Leasing's revenues came in at $398.3 million in the reported quarter, marking a 29.1% year-over-year surge. This was driven by a 26% rise in the number of active doors and 8% growth in invoice volume per active door. As of Sep 30, 2017, this segment had 675,000 customers representing a 25% growth year over year.

The segment’s adjusted EBITDA was $39.3 million compared with $37.2 million in the year-ago quarter. However, adjusted EBITDA margin contracted 220 bps to 9.9%.

Aaron's Business

Aaron’s Business’ total revenues declined 4.9% to $431.7 million in the third quarter. Also, lease revenues and fees were down 2.3%. Non-retail sales slumped nearly 16.2%, which was somewhat hurt by the acquisition of SEI.

On May 13, 2016, the company sold the assets of its HomeSmart unit, which recorded revenues of $25.4 million as of Sep 30, 2016. Excluding the HomeSmart unit, total revenue for the segment fell 4.9% in the reported quarter.

Adjusted EBITDA for the Aaron's Business segment was $30.8 million, down 23.8% from the year-ago figure of $40.4 million. Additionally, EBITDA margin contracted 180 bps to 7.1%.

DAMI

Revenues at the DAMI segment were $8.9 million in the reported quarter, up from $6.5 million in the year-ago period.

Financial Position

Aaron’s ended the quarter with cash and cash equivalents of $126.3 million, debt of $372.7 million and shareholders’ equity of $1,574.0 million.

During the nine months of 2017, the company generated cash from operations of $180.3 million. Markedly, Aaron's did not repurchase any shares in the quarter under review. However, it had an authorization to buy back an additional 7.9 million shares as of Sep 30.

Store Update

In third-quarter 2017, Aaron’s bought 104 franchised stores while it shut down or consolidated nine company-operated outlets and five franchised stores. Further, the company sold seven company-operated stores and two franchised stores to third parties.

As of Sep 30, 2017, Aaron’s Business had a total of 1,181 company-operated stores and 569 franchised stores.

These strategies clearly indicate the company’s intention to right size its operating scale. In the quarter, the company’s Aaron's Business spent a pre-tax restructuring charge of $0.8 million, on account of the store closures as well.

Guidance

Management remains impressed with its quarterly performance and is optimistic on its Progressive business’ growth while improving the Aaron's Business’ direct-to-consumer operations.

Excluding the anticipated impact of the hurricanes, management reiterated its outlook for 2017 that was issued in the second-quarter earnings. Aaron's continues to expect total revenue in the range of $3.33-$3.44 billion. Total revenue for Aaron’s Business segment is still projected in the band of $1.75-$1.80 billion, including lease revenue of $1.40-$1.45 billion. Additionally, comps at Aaron’s Business segment are continued to decline in the range of 7-9%.

While revenues at Progressive are still estimated in the band of $1.55-$1.60 billion, the same at the DAMI segment are projected to be between $25 million and $35 million.

The company’s adjusted EBITDA is still expected to be in $355-$378 million band. On a segmental basis, Aaron’s Business adjusted EBITDA is continued to be anticipated in the range of $170-$180 million. EBITDA for the Progressive division is still guided in the band of $190-$200 million. For the DAMI segment, Aaron’s reiterated its EBITDA projection in the range of negative $2-$5 million.

Meanwhile, management continues to anticipate 2017 adjusted earnings in the band of $2.45-2.65 per share. The Zacks Consensus Estimate for current-year is pegged at $2.54 per share. Notably, this guidance excludes the Progressive and franchisee acquisition associated with intangible amortization, along with the future one-time or unusual items.

GAAP earnings are still projected in the range of $2.10-$2.30 per share.

Conn's, with a long-term earnings growth rate of 18.5%, has pulled off an impressive average positive earnings surprise of 420.2% in the last four quarters.

GameStop, with a long-term earnings growth rate of 13.5%, has delivered an average positive earnings surprise of 7.6% in the trailing four quarters.

Big Lots, with a long-term earnings growth rate of 13.5%, has come up with an average positive earnings surprise of 81.1% in the trailing four quarters.

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